lesson 2 - monetary policy Flashcards
define monetary policy
process by which a country’s central bank manages the supply of money to achieve goals; controlling inflation, achieving full employment, promoting economic growth
how does the central bank manage the money supply
use tools like adjusting interest rates, open market operations, changing reserve requirements
what happened with the monetary policy during covid-19
countries adopted the expansionary monetary policies with the goals of increasing money supply, reduce unemployment, boost economic growth and they achieved this through: lowering interest rates, buying back government securities, emergency lending programs
what’s the effect of lowering interest rates, buying back government securities, emergency lending programs
lowering interest rates decreases the cost of borrowing so this encourages both individuals and corporations to invest and spend.
buying back government securities and having emergency lending programs puts money back into the pockets of individuals as individuals prefer having more money during hard times than more money in economic booms.
these ultimately caused inflation to increase as consumers were encouraged to spend, thereby increasing demand leading to higher prices
what happened to monetary policy after covid-19
to fight inflation, central banks began adopting contractionary monetary policies; hiking interest rates to incentivize saving and reduce borrowing
lowering inflation rates as ppl had less to spend, demand dropping thereby lowering prices
why do countries like canada try to maintain inflation at 2%
this low stable inflation rate is key to minimizing the risk of deflation and high inflation. This low rate of 2% provides individuals and corporations with an expectation of how prices will increase in the future and how they may plan better for it, increasing stability. 2% ALSO GIVES THE CENTRAL BANK space to cut interest rates if necessary before heading to low into the zero interest rates
the 2% is low enough that customers won’t try to delay their spending but it also encourages them to spend and invest.
what’s quantitative easing and tightening
quantitative easing: a form of monetary policy where the central bank purchases securities in the open market to reduce interest and increase money supply - QE creates new banks reserves, providing banks with more liquidity and encouraging lending and investment; looking to increase domestic money supply and spur economic activity as banks can lend money with lower interest rates/easier terms
quantitative tightening: central bank sells securities/treasuries or by letting them mature and not get renewed to remove from the cash balances. QT decreases liquidity of banks, reducing amount of money in circulation leading to higher interest rates. risk of QT is triggering global economic crisis bc the central bank selling securities leading to panic in lack of liquidity
what’s the future predictions of monetary policy post covid
reintroduction of expansionary monetary policy
what’s the effect of expansionary/contractionary monetary policies on public/private equity
expansionary: cutting interest rates reduces the cost of borrowing, increasing growth, increasing profit margins?
contractionary: raising interest rates: increasing cost of borrowing, decreases expansion, decreased investments and profitability?
what’s the effect of expansionary/contractionary monetary policies on bonds
with cutting interest rates: existing bond prices increases and thus were preferred, leading to less demand for bonds??
with increasing interest rates; existing bond prices decreased, new short term bonds were preferred, leading to more demand for bonds. as people value security
what happened to the real estate market during and after covid
during covid: rising demand for suburbs with shift to hybrid and remote work
after covid: there’s more expensive housing with remote work desired, less demand for suburbs more demand for condo.
how can changing reserve requirements affect banks?
if higher, banks can’t lend out as much, so they would be more though to get money lent + have a high interest rate
